Armstrong World Industries, Inc. (AWI - Analyst Report) reported second-quarter 2013 adjusted earnings of 62 cents per share, declining 15% from the prior-year quarter’s earnings of 73 cents per share. The quarterly earnings also fell shy of the Zacks Consensus Estimate by a penny.
Higher labor costs associated with added crews at several solid wood plants to meet increased demand, and increased manufacturing and input costs dragged down the profits despite a rise in revenues.
On a reported basis, including one time items, earnings decreased 28% to 51 cents per share from the prior-year quarter’s earnings of 71 cents.
Net sales increased 5% year over year to $707 million in the reported quarter, beating the Zacks Consensus Estimate of $696 million fueled by higher volumes in Wood Flooring and Building Products. However, the sale of the Patriot wood flooring distribution business in the third quarter of 2012 had a negative impact of $10 million on sales in the quarter.
Cost of sales increased 7% to $542 million in the reported quarter. Gross profit declined 4% to $164 million from the year-ago quarter. Gross margin contracted 200 basis points (bps) year over year to 23.3% in the quarter.
Selling, general and administrative expenses increased 3% to $111 million in the quarter. Adjusted operating income decreased 17% to $71 million in the quarter from $86 million in the prior-year quarter due to higher manufacturing and input costs. Operating margin contracted 270 bps year over year to 10%.
Building Products: Net sales at the Building Products segment increased 6.5% to $316 million, aided by higher volumes and positive price and mix performance in the Americas. Adjusted operating profit for the segment increased 8% to $67 million from $62 million in the year-ago quarter. Higher volumes and reduced manufacturing costs, resulting from increases in productivity, offset additional start up costs associated with the China plant that was opened earlier this year.
Resilient Flooring: The Resilient Flooring segment reported sales of $252 million, down 0.6% from the year-ago quarter affected by lower price and mix. Volume growth was witnessed in the Americas, but was offset by lower volumes in Australia. The segment’s adjusted operating profit was $183 million, down 18% from $22 million in the year-ago quarter. Unfavorable pricing, manufacturing and input costs as additional start-up costs associated with the two China plants more than offset productivity improvements in the Americas and led to the decline.
Wood Flooring: Net sales in the reported quarter went up 10.7% year over year to $138.2 million. The improvement was driven by a strong volume growth owing to favorable pricing, strong demand from independent distributors as well as share gains with independent distributors and in the home center channel from new product introductions. However, adjusted operating profit declined 79% to $3 million in the reported quarter from $14 million in the prior-year quarter.
Cash and cash equivalents were $304.7 million as of Jun 30, 2013 compared with $217.3 million as of Jun 30, 2012. Cash flow used from operating activities was $57 million in the reported quarter compared with $63 million in the prior-year quarter.
Free cash flow was $32 million in the quarter, down from $36 million in the prior-year quarter. The decline was due to lower cash earnings and timing of environmental charges related to the closure of the Mobile, AL facility in 2012, somewhat offset by improvements in working capital and lower capital expenditures and interest expense compared to the prior year.
Armstrong World maintained its full-year 2013 sales guidance in the range of $2.7 to $2.8 billion. Despite increased volumes in most of its businesses and geographies, manufacturing and lumber inflation headwinds remain in the wood business. The company also expects a lower commercial market opportunity in Europe for the remainder of the year. Armstrong World has thus lowered its forecast for adjusted EBITDA to the band of $370 to $400 million from the previous $390 to $420 million. The company has also reduced its full-year adjusted EPS from the previous range of $2.15 to $2.45 to the new range of $2.00 to $2.30.
For the third quarter of 2013, Armstrong expects sales to be in the range of $740 and $780 million and adjusted EBITDA in the range of $110 to $130 million.
Pa.-based Armstrong is a leading global producer of flooring products and ceiling systems for use in the construction and renovation of residential, commercial and institutional buildings. Armstrong also designs, manufactures and sells kitchen and bathroom cabinets in the U.S.
Armstrong currently retains a short-term Zacks Rank #4 (Sell). Other companies in the building and construction industry with favorable Zacks Ranks are Aegion Corporation (AEGN - Snapshot Report), James Hardie Industries plc (JHX - Snapshot Report) and Masco Corporation (MAS - Analyst Report); each carrying a Zacks Rank #2 (Buy).